Taxes and the Home-Based Business

It's great to be able to play with the kids or toss a load of clothes in the laundry while running your home-based business, but don't forget that it's still a business, and that means preparing for and filing taxes. Carol Anne Carroll walks you through useful deductions and IRS expectations.

From the author of

From the author of

A home-based business creates changes in many aspects of our day-to-day
lives. While most home business owners anticipate many of the changes, taxes can
be an area where the suspension of disbelief remains strong. While we
acknowledge that a home business can require longer hours, a change in schedule,
and a shift in work/life balance, there's often a secret expectation that
we can cling to the 1040EZ we've been able to file (barely)or at
least the 1040Awithout many schedules or addendums.

In fact, as soon as you start your business, you should start thinking about
taxes. The IRS certainly expects you to do so, as they'll anticipate
quarterly payments of your estimated tax throughout the calendar year. And come
April, the IRS will also expect a complete accounting of your business proceeds,
expenses, and any additional tax owed.

NOTE

Disclaimer: The content of this article is provided for informational
purposes only. The author of this article is not a lawyer or an accountant, the
accountant interviewed is providing information for illustrative purposes only,
and nothing here should be construed as legal or tax advice. For all questions
regarding tax matters, you should consult an attorney or an accountant, not the
World Wide Web.

The Basics

The best way to begin to prepare for taxes (and by preparing, make them
easier to handle) is to keep excellent records of your income and expenses. That
means tracking both regularly, entering amounts into a spreadsheet (as I suggest
in my book, Start Your Own Home Business in No Time) or into your
favorite accounting software, such as Quicken.

But with a home-based business, you need to maintain additional records.
These all relate to the home office deduction (shown on Schedule C of federal
income tax forms, and detailed on Form 2106, Employee Business Expenses).
Schedule C is the central focal point for anyone running a sole proprietorship,
as in most home businesses. You may want to coordinate your expense categories
with those found on Schedule C, simply to make taxes an easier task. While other
schedules can seem daunting, this schedule has dropped the esoteric labels,
allowing you to use the expense categories throughout the year without needing a
translator. For instance, the schedule has categories such as advertising,
commissions and fees, supplies, and so on, so the headings should be
workable.